A productive economy requires a growing low-carbon industry

Posted by Nick Molho on 10th September 2015First published in: The Economist

As the UK parliament returns to business, the government has the opportunity to put in place measures that will modernise the UK’s infrastructure and make its economy more productive. This must include policy decisions to support the environmental and low-carbon goods and services industry, argues Nick Molho, executive director of the Aldersgate Group.

In the context of a comprehensive spending review driven by the requirements of deficit reduction and concerns around the possible impacts from the economic slowdown in China, the UK government faces some difficult policy decisions in the months ahead. However, therein lies an opportunity for the government to strengthen the foundations that will modernise and improve the productivity of the economy.

The continued growth of the UK’s environmental and low-carbon goods and services industry is key to this. Today, it already involves over 11,500 businesses that are investing in a wide range of infrastructure—from more efficient buildings and resource-efficient manufacturing to low-emission transport, power and heat solutions. This investment is critical to modernising our infrastructure, making our economy more efficient and productive, improving our energy security and meeting our carbon targets on time and at the lowest cost.

In 2013, the last date for which we have government figures, the industry was already making an important contribution to the UK’s economic recovery, with a turnover of £122bn; this represents growth of 7.6% per year (on a compound basis) since 2010. Critically, the industry is also part of a growing international market for low-carbon goods and services, which a recent study from the Global Commission on the Economy and Climate evaluated at US$5.5tn in 2015.

The importance of stable rules and clear policy goals
When considering the future of the low-carbon economy, one must understand that businesses invest in response to market opportunities created by stable rules and clear policy goals. This is particularly the case for projects involving new low-carbon technologies that often have a significant upfront capital cost and can take eight to ten years to build in areas such as clean energy.

Unfortunately, the investment climate in the UK’s low-carbon industry is far from serene. The recent series of retrospective policy changes that have impacted the onshore wind, solar and construction industries have created much concern in parts of the industry and the investment community and risk undermining future infrastructure investment.

The good news is that the government has the opportunity in the coming months to provide the kind of policy visibility and stability that the low-carbon economy requires. What is needed are measures that can guide investments in a wide range of infrastructure by providing manufacturers, project developers and investors with enough support to get projects off the ground and enough clarity to enable them to efficiently plan their operations for the years ahead.

These measures should include the following:

providing clarity as soon as possible on the future size of the
levy control framework to fund clean-energy projects;

making energy efficiency in homes an infrastructure priority,
so that investments and energy savings can be delivered at scale;

extending policies such as the Renewable Heat Incentive to
accelerate the roll-out of low-carbon heat; and

continuing to support the consumer take-up
of low-emission vehicles.

The measures outlined above will help to release investments, support innovation, continue to reduce the cost of new technologies, grow supply chains and ensure the UK’s future low-carbon infrastructure is delivered in a timely and cost-effective fashion.

Government departments crucial for low-carbon economy
The Department of Energy and Climate Change, the Department of Food and Rural Affairs and the Foreign and Commonwealth Office perform important (but often overlooked) functions in the environmental and low-carbon arena that are important for the future prospects of the UK economy—from managing infrastructure risk from flooding and providing access to high-quality natural resources, such as water, to creating trade opportunities for UK businesses as part of the government’s international climate change diplomacy.

Modernising the UK economy therefore requires that the government's comprehensive spending review does not compromise the effective delivery of some of the key functions carried out by these important government departments.

The UK has witnessed significant growth in its low-carbon economy and infrastructure over the last five years. But with rising uncertainty over investment and many support policies ending during the course of this parliament, now is the time for the government to build on these achievements and work with businesses to deliver the modern, productive and low-carbon economy the UK deserves.